Download The Story of CMLTI 2006-NC2

The Story of CMLTI 2006-NC2
February 2011
FCIC
On June 9, 2006, Citigroup agreed to purchase approximately $1 billion in loans from New Century. The
characteristics of the loans to be purchased were spelled out at that time, as was the price: Citi would pay
$102.55 for every $100 in mortgage balance.
The trade ticket and “stip” (stipulation) sheet summarize the details of the deal and the pool that would be
created.
Tab 1: Citi Commitment Letter
Source: New Century Bankruptcy Trustee
Tab 2: Trade ticket
Source: New Century Bankruptcy Trustee
Tab 3: Stip Sheet
Source: New Century Bankruptcy Trustee
The deal would involve two pools of loans – one that conformed to the GSE limits and one that did not. On
July 20, New Century sent Citi a description of the loans in the first pool. A week later they sent a
description of the two pools combined.
Tab 4: E-mails regarding the deal
Source: New Century Bankruptcy Trustee
Through late July and August, one or two at a time, loans were pulled from the pool for legal issues,
because they had been sold into other pools, or for other reasons.
Tab 5: E-mails
Source: New Century Bankruptcy Trustee
Due diligence for this deal was performed by 406 Partners, LLC. The review was to take place at New
Century between 7/31 and 8/11. 406 Partners sent New Century the list of loans they wanted to review –
as per the initial sale agreement, 25% of the loans would be sampled for credit review. In the end, more
than 200 loans were removed from the pool.
Tab 6: E-mail from 406 to New Century
Source: New Century Bankruptcy Trustee
Tab 7: Spreadsheets showing results of the review
Source: Citigroup
Note: these fields are included in final data file
As the loan purchase was closing on August 29th, New Century sent a final list of the 4,521 loans they were
selling. Citi personnel saw violations of the initial agreement: 14 NINA loans (no income, no assets) and too
few loans with prepayment penalties. They forced New Century to keep the 14 NINA loans and bargained
the price down to account for the other problems.
Tab 8: E-mails detailing the problems
Source: New Century Bankruptcy Trustee
Tab 9: Final trade summary showing 4507 loans
Source: New Century Bankruptcy Trustee
With the loans settled, $978.6 million had to be moved from Citigroup to New Century. These loans were
funded by a series of warehouse lines with individual loans serving as the collateral. New Century sent Citi
the wire instructions; Citi sent the money, and the individual lenders released the loans as they were paid
back.
Tab 10: Wire instructions
Source: New Century Bankruptcy Trustee
Tab 11: Tracking e-mail from Citi to NC
Source: New Century Bankruptcy Trustee
Tab 12: Release letters
Source: New Century Bankruptcy Trustee
Citi then began to market the various tranches of this mortgage-backed security.
Tab 13: Prospectus (Citi)
Tab 14: Fannie Term Sheet
To sell the bonds, Citi needed the rating agencies to rate them. On September 11, S&P ran its model and
confirmed the ratings of the individual tranches. When the deal was priced on September 12, the interest
rates on some of the bonds were slightly different than those S&P had originally modeled. The final models
were run on September 26 as the deal was closing. S&P sent the final ratings letter to Citi. For rating this
deal, S&P earned $135,000. (A second agency, Moody’s, earned $208,000.)
Tab 15: Moody’s Invoice
Tab 15b: S&P Invoice
Tab 16a: S&P ratings letter to Citi
Tab 16b: S&P Final Deal Summary
Tab 16c: S&P ratings summary doc
Tab 16d: S&P pre-closing checklist
Tab 16e: True sale letter
Tab 17a: Model runs 9-11
Tab 17b: Model runs 9-26
Tab 17c: Waterfall (from runs above)
Tab 18: Moody’s rating memo
When the deal closed on September 26 , Citi had lined up investors around the world. Banks and funds in
England, Germany, Italy, France, and China all bought pieces of the deal.
Some investors merit special mention:
• Fannie Mae bought the A1 tranche
• Cheyne Finance, one of the first SIVs to collapse, bought the M1 tranche
• Parvest Euribor, one of the hedge funds owned by Paribas that froze redemptions, bought the M2 tranche
• Bear Stearns Asset Management and JP Morgan Chase’s securities lending group were also investors
Tab 20: Investor lists
Source: Citi
Most of the mezzanine tranches were bought by CDOs, including the cash deal Kleros Real Estate III
Tab 21: Docs regarding some of the CDOs that bought the deal
In addition to cash deals, a number of synthetic/hybrid CDOs held credit default swaps (CDS) referencing
the lower-rated tranches of this deal. These included Volans Funding 2007-1, Glacier Funding CDO V, and
Auriga CDO
Tab 22: Offering circulars and pitch books for some of the synthetic CDOs that referenced the deal.
The bonds would perform as long as the mortgages did. The following maps show that performance over
time.
(Graphic to show performance of loans and bonds)
The performance of CMLTI 2006-NC2 can be traced in parallel with a timeline of the crisis:
• July 10, 2007: Moody’s downgraded 399 residential mortgage-backed securities—the lower three
tranches of this deal were among these downgrades
• August 9, 2007: BNP Paribas froze redemptions
• August 28, 2007: Cheyne Finance announced funding trouble
• October 11.2007: More mass downgrades issued, including tranches of this deal
.
By 2008, foreclosures were rampant among these loans and loan modifications had begun. The lowerrated tranches were all wiped out. The A1 and some of the A2s were still performing. By late 2009, all the
tranches had been downgraded.
By September 2010, many borrowers whose loans were included in this securitization had moved or
refinanced their mortgages; by that point, 1,917 had entered foreclosure (mostly in Florida and California),
and 729 had started loan modifications. Of the 1,715 loans still active loans, 579 were seriously
past due in their payments or currently in foreclosure.
Data file to be posted on website including origination details for all 4,499 loans, along with monthly performance data